HUD to Increase the Frequency of Surplus Cash Distributions for Some Borrowers

• October 3, 2022
• Carey M. Heyman, CPA

In a letter dated September 7, 2022, HUD stated their intention to increase the frequency of surplus cash distributions for eligible borrowers from semi-annually to monthly.  The letter stated that, “[the] policy aligns HUD’s multifamily insurance for unassisted projects with industry standards and increases its competitive standing in the lending industry.” Finally, the end (for some) to the semi-annual distribution rule, which was created nearly fifty years ago.

Below are some highlights from the HUD letter: 

• This letter applies only to projects with HUD Regulatory Agreement Form HUD-92466M for multifamily projects with loans endorsed after the effective date of the mortgagee letter.
• An eligible borrower is defined as an FHA-insured multifamily property, not subject to a Section 8 project based-rental assistance payments contract or a HUD-held mortgage note.
• Projects with loans closed prior to the date of the letter are ineligible and HUD will not consider amendments to executed regulatory agreements.
• Eligible borrowers may be able to elect to take distributions as frequently as monthly, but is not required to, as opposed to waiting for the semi-annual calculations.
• In addition, an eligible borrower is subject to other considerations:
  • The borrower must be in compliance with all applicable program requirements and must have no more than one instance, during the three prior fiscal years preceding the fiscal year to which the distributions relate, of noncompliance with all applicable HUD business agreements.
  • The project must meet the minimum Debt Service Coverage Ratio, as established in program obligations as of its most recent annual financial statement.
  • The most recent REAC inspection score must be at least 80 and cannot have been lower than 60 in any of the three preceding fiscal years.
  • Newly endorsed new construction, substantial rehabilitation properties and properties with transfers of ownership must complete two full fiscal years before eligible.
  • Generally speaking, newly endorsed Section 223(f) properties require one full fiscal year before eligibility; however, exceptions may be made.
  • If an eligible borrower elects monthly surplus cash distributions, an annual calculation must be performed and submitted with the annual financial reports.  There is no need to submit monthly calculations with the annual report. 
  • The borrower must have positive surplus cash annually; if not, the borrower has 60 days after the end of the fiscal year to repay distributions taken. 
  • The borrower must maintain signed monthly surplus cash calculations to support the distributions taken.

Happy days are here again! The HUD letter is available here.

Thanks to Sara Backes and Renee Bardenwerper for their assistance with this blog post!

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